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Microfinance goes digital

06 Jul 2022

  • Borrowers raise concerns over unregistered, unregulated online moneylending schemes 
BY Sumudu Chamara Several years ago, especially during the tenure of the former United National Front (UNF)-led Government, the issue of unregulated microfinance loans and the unethical actions of those providing such loans attracted widespread attention, leading to several national-level discussions regarding the same. Even though that attention seems to have waned considerably, as The Morning reported recently, the issue is far from being resolved, and people, especially farmers and women, are still experiencing the impacts of unethical microfinance loan practices. While that issue persists with no proper plan in place to address it, over the past two years, similar loan schemes have entered the digital space, especially on social media platforms and websites. With the promise of providing small loans of a few thousand rupees first and then granting bigger loans depending on the repayment of the initial loan, many unregulated and unregistered lending services have mushroomed during the past two years. A large number of people who have obtained such loans have a plethora of complaints about these lending services and loans. The ‘small loans first’ bait One of the major issues pointed out by those who have obtained such loans was these online lending services giving smaller loans as the first step for obtaining bigger loans. Thirty-four-year-old private sector employee Hasantha Perera (name changed on request) who had obtained such a loan, explained the situation: “I once saw this Facebook page that claimed to be of a lending institution, and they said that they would provide loans up to Rs. 50,000. I came across this Facebook page at a time when I was in need of financial assistance. Getting a loan from a bank at that time (February of this year) was extremely difficult, and therefore, I filled in their online form to apply for a loan.  “Despite having said that they would provide loans up to Rs. 50,000, they approved only Rs. 10,000 for me, because it was my first loan. I thought it was fair, because they did not know me and all they had was the information I had provided. With the hope of settling the first loan in order to be eligible for the actual amount that I needed, I paid loan instalments on time. However, then I realised that I was required to pay an interest too.  “Even though they had advertised that there was no interest for the first loan, as I was about to finish paying all instalments, I received an SMS message saying that I had to pay around Rs. 2,100 more as interest. I had no option but to pay the interest rate because it was necessary for me to borrow the actual amount that I needed. Therefore, I paid the interest as well as the initial loan.” However, Perera said that once he had paid the full amount, the next loan he was eligible for was worth Rs. 20,000, not Rs. 50,000. He added: “They don’t give the amount we ask for, and instead, they encourage us to accept a smaller loan, which has to be repaid with an interest rate that we are not informed about at first. The worst issue is that these interest rates are extremely high. The interest rate I paid for the first loan was more than 20%, and I know people who took similar loans at a 40% interest rate.” He expressed concerns that with the hope of getting the actual amount that they needed, people usually pay these unfair interest rates, only to be told that several more loans have to be taken in order to get the amount that they need, or that the amount they need cannot be obtained. “This is clearly bait,” he emphasised. Sharing a similar story, 41-year-old private sector employee Jayantha Silva (name changed on request) who obtained a loan through a website he came to know about through Facebook, said that these lending services misuse people’s financial difficulties and legitimate but strict regulations imposed by recognised banks when issuing loans.  He added: “These lenders are living off of people’s pain. What they are doing is giving people the false hope that they will receive the amount that they need once the initial loans are settled with a high interest. People pay whatever the interest that they are asked to pay as interest. I believe that these loan schemes came into existence several years ago. My question is why no proper actions have been taken against them.” Speaking of what factors prompt people to opt for these loans despite the fact that they are not coming from reliable lenders, Silva said: “For the most part, banks and the authorities are to blame for the people’s tendency to blindly trust these lending services. An ordinary person has to submit many documents, agree to strict and non-negotiable conditions, and wait for weeks or sometimes months to get a loan from a reputed bank. They also have to provide a guarantee, which many people do not have.  “Although such precautions have to be taken in order to be sure that the borrower will pay the money back, such conditions have severely discouraged the people from seeking loans from credible banks.”  He further stressed that most of the time, people take loans in emergencies, and going through such rigorous processes in an emergency situation is not something many people are willing to do. He added that in some cases, people do not even care about how high the interest rates are, as getting their hands on some money to manage their needs is what becomes the priority when people are in desperate situations. Interest rates and the process of collecting interest Interest rates imposed by online lending services are a major concern. As The Morning learnt, in some cases, borrowers are not informed of an interest or the exact interest rate until the last stages of the repayment process, while in some cases, interest rates change without prior notification.  With regard to interest rates, 31-year-old private sector employee Migara Samaranayake (name changed on request) who had obtained a loan via a website, said: “Sometimes, they do not reveal what the interest rate is prior to issuing a loan. Sometimes, those websites show how much interest would be applicable for a certain amount of loan. However, they do not clearly reveal what the interest rate is. The biggest interest-related concern is not revealing that they charge interest.  “When these lending services advertise, they say, for example, Rs. 50,000 can be borrowed and that there is no interest. However, that is misleading information. When we try to take a loan, we have to take a small loan first, which is subject to an extremely high interest rate.”  Nanayakkara noted that interest rates usually range from 20% to 80%, and opined that these online loan services are not any different from microfinance loans that affect rural communities. “People think that interest is a small matter, sometimes because of the urgent need of money. However, it should be one of their main concerns when taking a loan,” he stressed. What is more, several persons who faced issues with regard to interest rates shed light on unethical acts by online lending services that amount to harassment.  In this regard, retired public sector employee Kamal Ananda (name changed on request), said: “Both myself and another person I know faced various forms of harassment by these lending institutions. They keep calling us and sending SMSs asking us to pay the interest, or settle the last instalment, even when we had already paid them. Sometimes they say that they have not received the payment. I have already heard of instances where some borrowers were threatened with legal action, when they had already paid what was due.” He further said that since these lending services do not have a physical address, it is difficult to deal with these issues, and that borrowers are left with no option but to deal with these complaints via the phone.  “Since we have not signed any formal agreement, it is difficult to take legal action. At the same time, taking legal action for a few thousand rupees is not worth our time and money,” Ananda further said. Another person who wished to remain anonymous told The Morning that there were times when these lending services charged an amount which can be identified as a fine for the delay in payments.  “I was scheduled to settle the amount that I borrowed on 29 December last year. However, I was not able to do so because of a personal reason, and I made the payment three days after the due date. Later, I was informed that I should pay Rs. 750 more, which was neither the interest, nor a part of the loan that I took. I asked what this Rs. 750 is for, and I did not receive a response. Therefore, I did not make that payment.” Collecting information and anonymity Another person who spoke to The Morning on the condition of anonymity, and who attempted to obtain a loan through a website, said that there is a reasonable suspicion that these loan providing websites also act as information gathering platforms.  He described: “I have spoken with several persons who filled in applications available on these websites in a bid to obtain a loan. However, sometimes, once the application is filled, they are not able to proceed to the next web page. Sometimes, an error message comes up, and sometimes, the website does not have a next step. So people have to give up hope about taking a loan, after providing all information including their name, addresses, national identity card number, and monthly income.”  In this context, he said, it is fair to assume that some of these so-called lending services collect people’s information. What is more, several comments on Facebook seen by The Morning also supported this allegation. Some Facebook users who had attempted to take loans had alleged that once their information was sent to online lending services via WhatsApp, they were blocked, and were not able to proceed. Even though The Morning attempted to contact the Lanka Microfinance Practitioners’ Association – which, according to their Facebook page, has introduced a hotline to accept complaints about microfinance loans-related issues – and also several online lending services (through their social media pages), to discuss the matter, those parties were not reachable. At a time when the people are struggling to survive the economic crisis, these unregulated and unethical lending services could be the cause of huge social issues too. There are people who would take loans with no regard to the conditions that they have to agree to, due to the prevailing economic situation. At the same time, people having to pay high interest rates, such as those seen in the case of microfinance loans, at a time of an economic crisis, can severely affect household economies. The authorities need to find out more information about these lending services and take prompt action against them, or people will be further victimised amidst challenging times.  


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